Employee Benefit Plan Audits: Common Deficiencies and Keys to Success

Written by Emily Riles, CPA

After the tax and audit deadlines in April, many companies begin to prepare for their Employee Benefit Plan (EBP) Audit for their 401(k) plan, 403(b) plan, defined benefit plan, ESOP, or health and welfare plan.

One question a company may initially ask is when is an EBP audit required? For 2022 calendar year-end audits, if a company has 120 eligible participants for its plan on the first day of the plan year (January 1, 2022), per the Department of Labor (DOL), the company is required to have an EBP audit attached with its annually filed 5500. Once an audit has occurred, the Plan must be audited every year thereafter until the eligible number of participants drops below 100. For a calendar year-end audit, the deadline is July 31st without an extension, and October 15th if an extension is filed. We recommend reaching out to your investment advisor, your recordkeeper, or a BMSS professional to ensure that you are having an audit performed when required. The penalties can be extremely high for missing a filing. It is also important to note that the requirements for filing are changing in 2023, so we suggest reaching out now to make sure you are in compliance.

During an EBP audit, many deficiencies can be found that are required to be reported to the plan’s management and board of directors. Although this list is not exhaustive, some of the most common findings in an EBP audit include:

1. Timeliness of remittance of participant contributions – Participant contributions should be remitted from payroll to the plan’s recordkeeper as soon as they can be reasonably segregated. With the electronic world that we live in today, this is typically within 3-5 business days.
2. Implementation of automatic de minimis distributions – If the Plan requires automatic distributions for terminated participants with balances of a certain dollar threshold (typically $1,000 or $5,000), the plan sponsor must ensure these balances are being automatically distributed to these participants in accordance with the plan document.
3. Lack of support in a participant’s personnel file related to pay rates, plan election forms (percentage deferral and investment direction), or other personnel data.
4. Incorrect deferral percentages or amounts used for participants.
5. Timely automatic enrollment or automatic increases for eligible participants with plans that have elected this feature.
6. Using the incorrect definition of compensation (i.e. including or excluding the proper pay codes) when calculating how much deferral contribution should be taken out of a participant’s earnings.
7. Ineligible participants contributing to the plan.

When a company undergoes an EBP audit, there are many steps the employee or team in charge of the audit can perform for the audit to move smoothly and efficiently. Some of these steps would be:

1. Having the plan’s recordkeeper login information for the audit team to pull investment and participant activity directly from the recordkeeper’s website.
2. Keeping an updated record of all of the plan’s documents (i.e., adoption agreements, volume submitter, basic plan document, amendments to the plan, investment policy, loan policy, etc.).
3. Preparing a timely remittance schedule that shows the timing for each pay period for when a company withholds employee contributions and when these contributions are remitted to the plan’s recordkeeper. We recommend adding this process to your payroll process each payroll period so that it doesn’t have to be completed at the end of the year.
4. Ensuring the plan is following the official definition of compensation when deciding what salary amounts/payroll codes should be withheld from contributions.
5. Keeping meeting minutes that document all plan discussions with the company’s investment advisors and/or retirement plan committee.
6. Ensuring personnel data is organized and kept on hand for plan participants such as hiring documents, termination documents, management-approved pay rates, and EBP election forms.

Following these steps can help ensure your EBP audit goes as efficiently (and quickly!) as possible. If you have any questions regarding EBP audits or the best ways to prepare for these audits, please feel free to reach out to the BMSS EBP Audit Team at (833) CPA-BMSS and we would be happy to help with any questions you may have. You can also visit our website for more information.